Dead Giveaway

Why don't more Americans use their free health insurance?

A thousand people gathered at a California Gucci outlet in the wee morning hours a few weeks ago, eager for Black Friday retail bargains. Seven times as many waited at the doors of the Macy's flagship store in New York City, and a modern-day shantytown was erected on Thanksgiving night in an Oakland Best Buy parking lot. One can only imagine the frenzy that would have broken out if someone had started handing out high-quality, free health insurance worth as much as a dozen wide-screen televisions.

And yet the bargain outlets giving away health insurance this season are eerily quiet. As Benjamin Sommers and Arnold Epstein recently reported in the New England Journal of Medicine, 40 percent of people who qualify for free coverage through the government's Medicaid program don't sign up. In the worst-performing states, like Oregon, Florida, Georgia, and Texas, more than half the eligible people aren't enrolled. Using adjusted estimates from the U.S. Census Bureau, tens of millions of Americans don't take the freebie, and tens of billions of dollars' worth of coverage are left on the table.

That's a huge problem for the architects of health reform, whose central aim is helping the 50 million Americans now without insurance. Much attention has been paid to the "individual mandate" in the landmark bill passed earlier this year, which has now been ruled unconstitutional by a Virginia federal court. But previous experience suggests that provision's impact on rates would be trivial. The real driver of expanded coverage is a planned extension of free health care to anybody with an income below 133 percent of the poverty line—or 15 million Americans, according to an estimate from the Congressional Budget Office. This entitlement is the biggest new federal giveaway of health care since the creation of Medicare and Medicaid in 1965.

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Unfortunately, people might not show up for the bargains. Consider what happened the last time we tried to give away more health care. In the late 1990s, the State Children's Health Insurance Program made it easier for children to get Medicaid-style insurance, and by 2002, almost half of all American kids qualified for free coverage. As a result, the number of uninsured dropped from 12 million to 10 million, which was great news. But consider the missed opportunity: Among the 10 million children who still lacked coverage, 60 percent were eligible for free care but never signed up.

So why on earth would people camp out overnight to buy a discounted toy, while they ignore a windfall like free doctor visits for their kids?

Some of them may have their priorities wrong, but many don't. The real problem is that state governments are trying to save money by keeping eligible people off the insurance rolls. In 2007, Health Affairs reported that fully one-third of all eligible but uninsured children had been booted out of Medicaid or SCHIP for no good reason, after being enrolled in the prior year. Some states make people file yearly or twice-yearly applications in order to stay covered, with in-person interviews and demands for a birth certificate. (Imagine being asked to retake your driver's test twice every year.) Make an error on your paperwork or forget an appointment and your kid automatically loses coverage.

Why are some states so miserly? Because they have every incentive to trim the rolls. Insuring someone through Medicaid costs around $7,000 per year, and in 2008, the country spent $340 billion on the program. Only about half of that money came from the federal government, with the rest draining from state coffers. (The exact proportion varies from state to state.) Because they're responsible for up to half the costs, states are given wide latitude to make their own Medicaid policies. That means places like Massachusetts and Pennsylvania are very inclusive and manage to sign up about 80 percent of eligible people for free health care, while cash-strapped states like Arizona—where an actual death panel just decided to deny organ transplants to Medicaid patients—have far more restrictive policies and enroll only half of those who are entitled to free health insurance.

It's clear why states might have worked against enrollment in the past, but according to the new law, the federal government will cover almost all the costs of people who are newly eligible for Medicaid. The states won't be on the hook for the millions of names that might soon be entered in the books, yet they're fighting the expansion of Medicaid benefits nevertheless. (Fourteen have sued to stop it.) So why are some state governments hell-bent on denying free care to needy people when it will hardly cost them a thing?

The answer lies in a little discussed provision of the law that aims to simplify enrollment into Medicaid. The law's architects realized that giving away insurance wouldn't be enough; they also wanted to force states to deal with the people who were already eligible for free care but had been squeezed out of the system. According to the new rules, you may soon be allowed to sign up for Medicaid via the Web, without any of those repeated in-person interviews. (Some states might start enrolling people into Medicaid automatically, just like how Medicare kicks in when people start collecting Social Security checks.) That's a problem for states with low enrollment rates now. The federal government may be ready to pay for all the newly eligible people on Medicaid, but the states must cough up half the costs for all the previously eligible people who are added to the rolls under the simplified system.

Imagine what might happen in Florida. Once the welcome mat of new regulations gets rolled out, 2 million previously eligible but uninsured people could sign up for free coverage. (That would bring the state's enrollment rates in line with, say, Pennsylvania.) Because those enrollees would get only a partial federal subsidy, Florida may be forced to chip in billions of dollars for the program. That liability terrifies state legislators already coping with drastic budget shortfalls. (Of course, these changes could have been avoided if they'd taken their obligations to the poor more seriously in the past.)

Without an explicit guarantee that more of these costs will be borne by the federal government, many states will fight tooth-and-nail against Medicaid expansion. They'll drag their feet on good-faith efforts to increase enrollment. When the dust settles, it's entirely possible that millions of Americans will remain uninsured. And then we'll talk about another round of health care reforms.